You are on page 1of 19

Negotiable Instruments

Atty. Rommel Mercado


INTRODUCTION Note: A valid instrument is not necessarily negotiable and a negotiable
instrument may be voidable, unenforceable, or void.
Characteristics of Negotiable Instruments:
Presumption: All negotiable instruments are presumed to be a contract, but
1. Negotiability
not vice-versa.
2. Accumulation of Secondary Contracts
Nature of Negotiable Instruments: a special kind of written contract which
Negotiability: a bill or a note may be passed from hand to hand similar to
serves as an instrument of trade or credit and transferable from hand-to-hand
money; it gives the holder, in due course, the right to hold the instrument and
like money
collect the sum payable for himself free from any infirmity in the instrument or
defect in the title of any of the prior parties, or defenses available to them Ratio for Formal Requirements: for the security of commercial transactions; it
among themselves enables someone to tell at a glance whether an instrument is negotiable or
not; to gauge the risks involved.
Accumulation of Secondary Contracts: occurs as negotiable instruments are
transferred from one person to another; once it is issued, additional parties Explanations for each Formal Requirement:
may be involved
1. It must be in writing: it is broadly construed as to include those which are
Theory of Negotiable Instruments: such instruments appear to belong to the reduced in tangible form; may be made on any thing aside from paper,
person having them in possession and to no one else. as long as it is movable; as long the material is capable of preserving the
writing if they are capable of circulating for a period of time to serve their
Forms of Negotiable Instruments:
credit and currency function.
1. Common Forms
Note: Determining the negotiability of an instrument largely depends on its
2. Special Types
face, no other words should be added or substituted therein.
Examples of Common Forms:
2. It must be signed by the maker or the drawer: Generally, it is placed at
1. Promissory Notes the lower right-hand corner, but it may paper in any part therein; one’s
2. Bill of Exchange signature is a prima facie evidence that he intends to be bound as a the
3. Bank Check maker or drawer; if it the signature was placed and it is not clear what his
Two types of Instruments according to the Negotiable Instruments Law: capacity is, he is deemed as merely an indorser.
3. It must contain an unconditional promise or order to pay: based on the
1. Promissory Notes – those in which the issuer has promised to pay nature of a negotiable instrument wherein it is an absolute undertaking
2. Bills of Exchange – those in which the issuer has ordered a third person to to pay rather than an acknowledgement of an obligation
pay 4. It must be payable in a sum certain in money: it must be from the point
Examples of Special Types: of view of the holder; negotiable instruments acquire a uniform standard
of value enabling them to pass freely in lieu of money.
1. Certificate of Deposit
2. Bank Notes Note: Money includes all those which are legal tender.
3. Bonds Legal Tender: a kind of money which can be used to lawfully pay a debt or
4. Drafts an obligation calling for money.
Policy in case of Doubt: the rule is that the court must resolve in favor of the 5. It must be payable at a fixed or a determinable future time or on
negotiability of the instrument; this is to encourage the free circulation of demand;
negotiable papers. 6. The drawee must be named or identified: it only applies to bills or checks
Function and importance of negotiable instruments: Non-negotiable Instrument: it does not meet the requirement laid down to
1. As substitute of money qualify a negotiable instrument, or an instrument that was negotiable in its
2. As a medium of exchange for most commercial transactions inception but has lost the quality of tis negotiability.
3. As a medium of credit transactions Nature of Non-Negotiable Instruments:
4. As a means, in case of check, of making immediate payment
1. A simple contract in writing and is evidence of such intangible rights as
may have been created by the assent of the parties; covered by the
Section 1. Form of Negotiable Instruments. – An instument to be general provisions of the CC not the NIL;
2. It may not be negotiated but it may be assigned or transferred
negotiable must conform to the following requirements:
Money: that which is coined or stamped by public authority and has its fixed
(a) It must be in writing and signed by the maker or drawer; value fixed by public authority; a medium of exchange authorized by the
(b) Must contain an unconditional promise or order to pay a government as part of its currency.
sum certain in money Promissory Note: According to Sec. 184, “A negotiable promissory note within
(c) Must be payable on demand, or at a fixed or determinable the meaning of this Act is an unconditional promise in writing made by one
future time person to another, signed by the maker, engaging to pay on demand or at a
(d) Must be payable to order or to bearer; and fixed and determinable future time, a sum certain in money to another or his
order or to bearer. Where a note is drawn to the maker’s own order, it is not
(e) Where the instrument is addressed to a drawee, he must be
complete until indorsed by him.”
named or otherwise indicated therein with reasonable
Parties in a Promissory Note/Promise Paper/Two-Party Paper:
certainty.
1. Maker – who makes the promise and signs the instrument; assumes
Commercial Paper: written promises or obligations that arise out of
liability to pay the payee or the holder; his signature must appear in the
commercial transactions from the use of such instruments as promissory notes
instrument
and bills of exchange; a simple promise to pay money.
2. Payee – the party to whom the promise is made or the instrument is
Note: All commercial papers arise from commercial transactions; they are payable; may be specified or not; may seek payment personally or
either negotiable or non-negotiable; it is the former if it satisfies certain formal further negotiate.
requirements.
Holder: refer to every person to whom an instrument is delivered
Negotiable Instrument: a contractual obligation to pay money; an instrument
Indorser: if a payee endorses the note to a third party; the latter is called
which possesses all the elements of negotiability provided in Section 1 of the
indorsee
NIL
Bill of Exchange: According to Sec. 126, “a bill of exchange is an unconditional
Matters to be considered in determining Negotiability of an Instrument:
order in writing addressed by one person to another, signed by the person
1. The whole of the instrument giving it, requiring the person to whom it is addressed to pay on demand, or
2. Only what appears on the face of the instrument at a fixed or determinable future time, a sum certain in money to order or to
3. The provisions of the NIL bearer

1
Negotiable Instruments
Atty. Rommel Mercado
Check: an order that is drawn on a bank and payable on demand 3. Exchange not applicable to inland or domestic bill – exchange cannot
occur if the instrument is drawn and payable at the same place
Parties to a Bill of Exchange/Order Paper/Three-party Paper:
Note: Under RA 8183, every monetary obligation must be paid in Philippine
1. Drawer – the person who issues and draws the order bill; gives the order
currency, unless the parties agree otherwise.
to pay money to a third person; does not pay directly
2. Drawee – the party upon whom the bill is drawn; the person to whom the Sum to be paid with costs of collection and/or attorney’s fee:
order is addressed and is ordered to pay; becomes the acceptor if he
1. Increase in amount due effective after maturity – does not affect
accepts the responsibility for the payment of the bill
negotiability because it does not affect the certainty of the amount
3. Payee – the party in whose favor the bill is originally drawn or is payable
payable upon maturity
Ratio of Bills of Exchange: 2. Uncertainty of sum payable only after maturity – anything which only
render the sum payable uncertain after the instrument has ceased to be
1. Drawer’s funds in the hands of the drawee – the drawee is the party
a substitute for money. But which in no wise affected it before such time,
primarily interested in, and benefited by the transaction
cannot impair its negotiability.
2. Liability of Drawee for non-payment – there must be an agreement
3. Liability for attorney’s fees – may be reduced by the Court if
obligating the drawee to honor the order of the drawer or an existing
unconscionable or unreasonable; not considered interest; if not
creditor-debtor relationship
specified, then it shall be set in a reasonable sum

Sec. 2. What constitutes certainty as to sum. - The sum payable is


Sec. 3. When promise is unconditional. - An unqualified order or
a sum certain within the meaning of this Act, although it is to be
promise to pay is unconditional within the meaning of this Act
paid:
though coupled with:
(a) with interest; or
(a) An indication of a particular fund out of which
(b) by stated installments; or
reimbursement is to be made or a particular account to be
(c) by stated installments, with a provision that, upon default in
debited with the amount; or
payment of any installment or of interest, the whole shall
(b) A statement of the transaction which gives rise to the
become due; or
instrument.
(d) with exchange, whether at a fixed rate or at the current
rate; or But an order or promise to pay out of a particular fund is not
(e) with costs of collection or an attorney's fee, in case unconditional.
payment shall not be made at maturity. Promise to Pay in Promissory Notes:
Sum Certain Requirement: if the holder can determine from the instrument the 1. Implied Promise to Pay - it is not essential the word “promise” is used, its
amount he is entitled to receive at maturity; a negotiable instrument must equivalent shall suffice
represent a fixed amount to paid wholly in money ascertainable from the 2. Bare acknowledgement of indebtedness - it is not a negotiable
instrument itself. instrument as it does not import an express promise to pay or show that
Sum to be paid with interest rate: merely incidental and cannot render the the parties intend the debt to be paid; mere evidence of a debt
instrument as non-negotiable because the entire sum is till certain: 3. Use of words of negotiability – it can be deduced from the language
used that it is a written undertaking to pay
1. Interest at fixed rate
2. Interest at increased or reduced rate Order to Pay in Bills of Exchange:
3. Accrual/Rate of Interest is not specified – if the instrument provides for 1. Words equivalent to an order to pay – the word “order” is not necessary
payment of interest but failed to specify the date when it will run, it shall its equivalent shall suffice
be computed from the date of the instrument, if not dated, form the issue 2. Mere request to pay – it must be a demand and not a request; an order
thereof; if the rate is not specified, legal rate shall apply, 6%. is a command or imperative direction; the language used must express
4. Usurious interest rate – the instrument is still negotiable because the the drawer’s will that money should be paid
principal remains valid. 3. Liability of drawer – if the drawee obeys the order or not, it is immaterial,
Sum to paid by stated installments: negotiability depends on the terms of the order.

1. With an acceleration clause – a promise that if any installment or interest Unconditional Promise or Order to Pay:
is not paid as agreed, the whole shall become due. 1. Instrument payable absolutely – not subject to any condition or
2. Acceleration dependent on maker – he can avoid acceleration by contingency, except implied conditions of presentment, protests, and
paying on due date; payee or holder cannot accelerate the not unless, notice of dishonor
the maker defaults 2. Ratio – enhances the ability of the instrument to circulate freely from one
3. Acceleration as an option of holder – it is a non-negotiable instrument person to another
Stated Installments: the interest in each installment and the due date of each 3. Terms not affecting unconditional liability
installment must be fixed in the instrument Indication of a particular fund out of which reimbursement is to be made: it is
Extension Clauses: appear in instruments with fixed future maturity date and negotiable because the order to pay is not conditional; drawee is not limited
proved that under certain circumstances, the date shall be further extended to the money that he has, which belongs to the drawer; fund indicated is not
the direct source of payment but only the source of reimbursement.
1. If the right is given to the holder - the time of payment need not contain
a new fixed maturity date or the length of extension need not be Indication of a particular fund out of which payment is to be made: it is a non-
specified negotiable instrument because it is not payable in any event and is
2. If the obligor is the one given the right to extend – the interest of the dependent ton the adequacy or existence of the fund designated. The test is
extension must be specified to keep the instrument negotiable whether the instrument carries the general personal credit of the maker or
drawer
Sum to be paid with exchange: refer to instrument that are payable in foreign
currency Indication of a particular amount to be debited with the amount: it is
negotiable because the promise or order is not conditional; payment is not
Exchange: the charge for the expense of providing funds are the place where confined to a particular fund, but still needs to be made
the instrument is payable to cover such instrument which is issued at another
place; may be at a fixed rate or current rate Statement of transaction which gives rise to instrument:

1. Payment in foreign currency – does not impair negotiability because the 1. Mere recital of consideration for instrument or origin of transaction – it
sum may be determined by the current exchange rate does not make the instrument conditional; such reference has no
2. Payment with exchange rate – applies to instruments drawn in one adverse legal effect on its negotiability
country and payable in another 2. Terms and conditions contained in another paper – it not negotiable
because the obligation to pay is burdened with the terms and conditions
2
Negotiable Instruments
Atty. Rommel Mercado
of another contract. Remember, the negotiability of an instrument must Note: a bill payable several days before the occurrence of an event is non-
be determined from what appears on its face. neogtiable, maturity of the instrument can only be ascertained after it has
become overdue. Therefore, the time of payment is ucnertain
Rule of Section 3: Negotiability of an instrument is not affected by a reference
which is simply a: Payable upon a contingency: a future and uncertain event, which may or
may not happen
1. A recital of the consideration for which the paper was given
2. A statement of the origin of the transaction Payable when able without an absolute date:
3. As statement that is given in accordance with the terms of a contract
1. A conditional promise – negotiability is destroyed by the contditipn and
between the same parties
the lack of a fixed time for payment
2. An absolute promise to pay at an unreasonable time – does not follow
the principle that a promise to pay within a reasonable time is not so
Sec. 4. Determinable future time; what constitutes. - An certain as to render an instrument negotiable
instrument is payable at a determinable future time, within the
meaning of this Act, which is expressed to be payable:
Sec. 5. Additional provisions not affecting negotiability. - An
(a) At a fixed period after date or sight; or
instrument which contains an order or promise to do any act in
(b) On or before a fixed or determinable future time specified
addition to the payment of money is not negotiable. But the
therein; or
negotiable character of an instrument otherwise negotiable is
(c) On or at a fixed period after the occurrence of a specified
not affected by a provision which:
event which is certain to happen, though the time of
happening be uncertain. (a) authorizes the sale of collateral securities in case the
instrument be not paid at maturity; or
An instrument payable upon a contingency is not negotiable,
(b) authorizes a confession of judgment if the instrument be not
and the happening of the event does not cure the defect.
paid at maturity; or
Instruments must be payable at all events: it must not be payable upon a (c) waives the benefit of any law intended for the advantage
contingency because it does not appear on its face whethere or not it will be
paid
or protection of the obligor; or
(d) gives the holder an election to require something to be
Note: A note stipulating that it may be renewed at maturity is non-negotiable
done in lieu of payment of money.
because there Is no unconditional promise to pay at maturity.
Certainty as to the time of payment: the payment will certainly become due But nothing in this section shall validate any provision or
and deamndable one time or other, thoguh it may be uncertain when that stipulation otherwise illegal.
time will come General Rule: An instrument is non-negotiable if it contains a promise or order
Instrument is Certain in Payment if: (1) Payable on demand; or (2) At a fixed to do any act in addition to the payment of money
and determinable future time Exceptions: if the law procvides otherwise
Ratio: 1. Sale of Collateral Securities – “I promise to paty X secured by an X …”
1. To let the holder know when he may enforce the isntrument; 2. Confession of judgement – acknowledgement by the debtor at his
2. To know when the statute of limitations will arise debt to another is justly due; enables the holder to obtain a judgement
3. So that the person liable woiuld know when he is required to pay without the delay incidental to a lawsuit because it cuts off all defenses;
4. So that secondary parties would know when will the obligation arise “I hereby authorize my attorney-in-law to appear in any court after the
obligation becomes due and waive the issueng and service of process
Demand Instrument: the holder may call for payment at any time
and confess jdugement against me in favor of the holder of the note
Term or Time instrument: payable only upon the arrival of the time for payment xxx.” Thus, invalidit of the confession of judgement does not render the
Checks: by definition, must be payable on demand instrument non-negotiable

Payable at a Fixed Time: “I promise to pay X on Dec. 12, 2018.” Note: Warrants of attorney to confess judgement are void for being against
public policy
Payable at a fixed period after date: “On or before sixty datys after date, I
promixe x x x.” – refers to date of issuance 3. Cognavit actiomen: he has confessed action; a written confession of
action by the defendant acknowledging his indebtedness to the
Payable at a fied period after sight: “60 days after sight, pay to order x x x.” – plaintiff after the action was filed
after sight means after the isntrument is seen by the drawee upon 4. Relicta Verificationem: his pleading being abandoned; confession of
presentment for acceptance or accepted by the drawee judgement by withdrawal of the defens
Payable on or before a fixed time: 5. Waiver of beenfit granted by law:
6. Election of holder to require some other act: gives the payee the right
1. “On or before x, I promise to pay…” – Maker has the option to pay to repossess the property sold; if the option wsi with the promisor, the
before due date, while Payee can demand only at the time fixed. instrument is non-negotiable
2. “On demand or at the end of the year x x x.” – payee has the power to
decalre the note due at any given time before maturity; it render the
note non-negotiable because it render the time of payment uncertain. Sec. 6. Omissions; seal; particular money. - The validity and
Note: An instrument is still negotiable if the holder’s right to exercise the option negotiable character of an instrument are not affected by the
depends upon the hapenning of a specified event over which he has no fact that:
control.
Extension Clause: “I promis to pay on or before X, but if I fail to collect on or
(a) it is not dated; or
before X, this note shall be extended to X.” (b) does not specify the value given, or that any value had
been given therefor; or
Payable on or before a future determinable time: a definite time upon or after
the occurenceof an event which is certain to happen (c) does not specify the place where it is drawn or the place
where it is payable; or
Payable on the occurrence of a certain event: Death of a person is absolutely
certain to happen, although its occurrence is uncertain (d) bears a seal; or
(e) designates a particular kind of current money in which
Payable after occurrence of an event: “20 days after Y dies x x x.”
payment is to be made.

3
Negotiable Instruments
Atty. Rommel Mercado
But nothing in this section shall alter or repeal any statute (d) Two or more payees jointly; or
requiring in certain cases the nature of the consideration to be (e) One or some of several payees; or
stated in the instrument. (f) The holder of an office for the time being.
Where the instrument is payable to order, the payee must be
Omission on Date: named or otherwise indicated therein with reasonable certainty.
1. General Rule: The date in a bill or note is not necessary; the instrument Standardized words of negotiability – serve as an expression of consent by the
will be considered to be dated as of the time it was issued issuer of the instrument that the instrument may be transferred, to whoever the
2. Exception: when date is necessary payee orders, allowing further negotiation of the instrument (to the order of,
a. If the date is tied to the date of issue or order, to bearer, or bearer)
b. Determining when the interest shall run When an instrument is payable to order:
c. For promissory notes, the date of issue
d. For bills of exchange, the date of the last negotiation thereof – to 1. Drawn payable to the order of a specified person
determine whether a party acted within a reasonable time in 2. Drawn to him or his order
making the payment Other term that may be used to express “to order” – “and assigns”
Date stated not in calendar: the law will deem the nearest date of the month When payee/drawee not named or described – nobody could give the order
the date intended. or authority to correct. There will be nobody who could indorse the instrument,
Omission of value: “it is fiven for value received …” wihtout specifying what hence, there is no point in considering it negotiable
the value is; consideration is presumed; the burden on proving the lack
thereof lies on the one alleging it.
Sec. 9. When payable to bearer. - The instrument is payable to
Note: There are no laws which require that the nature of the consideration is
stated in the instrument. bearer:
Ommission of Place: the place where it is drawn or made or where it is (a) When it is expressed to be so payable; or
payable is not essential. Section 73 provides:
(b) When it is payable to a person named therein or bearer; or
a. An instrument is presumed to have been made where it is dated
b. A note that does not specify the place of payment is presumed to be (c) When it is payable to the order of a fictitious or non-existing
payable at the place of residence of the maker person, and such fact was known to the person making it so
c. If the place of execution or payment is not stated, it is presumed to be
payable; or
the maker’s or drawer’s palce of business or his home
Presence of Seal: it does not destroy negotiability; there is no difference; it is (d) When the name of the payee does not purport to be the
advised to have it appear in a public instrument so that it will be included name of any
among the preferred credits with respect to other property of the debtro
person; or
Designation of a particular kind of money: The law does not requrie that
payment be made in legal tender; it includes any kind of current or foreign (e) When the only or last indorsement is an indorsement in blank.
money which has fixed value in relation to our money Bearer: the person in possession of a bill or note which is payable to bearer
Instrument payable to bearer – negotiated by mere delivery. There is no need
to indorse the instrument. Whoever is in possession of the instrument is the
Sec. 7. When payable on demand. - An instrument is payable on bearer thereof; hence, he is the holder of the instrument and the same is
demand: payable to him

(a) When it is so expressed to be payable on demand, or at Fictitious person: one who, though named or specified as a payee in an
instrument, has no right to it because the maker or drawer so intended and it
sight, or on presentation; or
matters not, therefore, whether the name of the payee used by him be that
(b) In which no time for payment is expressed. one living or dead, or one who never existed
Where an instrument is issued, accepted, or indorsed when When instrument payable to bearer:
overdue, it is, as regards the person so issuing, accepting, or 1. Expressed to be payable to bearer – may also be expressed as “to
indorsing it, payable on demand. holder,” “or holder,” “or to any one whom he may deliver it or to any one
First paragraph – not only between parties, but also as to subsequent parties who might hold the same by delivery”

Second paragraph – applies only to immediate parties (there is no difference Note: “payable to the order of bearer” is payable to order, not to bearer
between a holder in due course and a person not a holder in due course) 2. Payable to person named therein or bearer – the words “or bearer” may
Other terms that may be used to express “on demand” – “at sight,” “or be presumed to be the maker’s intent for the bearer to give control to
presentation,” “on call,” “at any time called for,” “at such times the payee the bearer over the instrument
may require,” “at the holder’s convenience” 3. Payable to order of a fictitious person – a name is fictitious when it is
feigned or pretended. If the payee is known to the maker or drawer and
When an instrument is payable on demand: is existing, the instrument will be one payable to order instead of to
1. Expressed to be payable on demand bearer
2. No time for payment is expressed 4. Payable to order of a non-existing person – payee named is one who
3. Payable on demand as regards the maker does not exist and has never existed. As this would render the
4. Payable on demand as regards the acceptor indorsement impossible, the manifest intent of the drawer is to necessarily
5. Payable on demand as regards the indorser make the instrument a bearer paper negotiable by delivery
5. Name of payee not name of person – aka, payable to an impersonal
payee. This essentially shows intent by the drawer or maker to make the
Sec. 8. When payable to order. - The instrument is payable to instrument payable to bearer
order where it is drawn payable to the order of a specified 6. Only indorsement in blank – when indorser simply writes his name on the
back of the instrument, the same becomes payable to bearer
person or to him or his order. It may be drawn payable to the 7. Last indorsement in blank – since the last indorsement is in blank, the
order of: instrument becomes payable to bearer and the same may negotiate
(a) A payee who is not maker, drawer, or drawee; or the bill by deliver
(b) The drawer or maker; or
(c) The drawee; or
4
Negotiable Instruments
Atty. Rommel Mercado
Sec. 10. Terms, when sufficient. - The instrument need not follow Sec 13. When date may be inserted – Where an instrument
the language of this Act, but any terms are sufficient which expressed to be payable at a fixed period after date is issued
clearly indicate an intention to conform to the requirements undated, or where the acceptance of an instrument payable at
hereof. a fixed period after sight is undated, any holder may insert
Exact words – not required, so long as words used clearly indicate an intention therein the true date of issue or acceptance and the instrument
to adhere to the requirements of the NIL. So long as requisites of negotiability shall be payable accordingly. The insertion of a wrong date does
are present, the instrument will remain negotiable not avoid the instrument in the hands of a subsequent holder in
Substance criterion of negotiability: due course; but as to him, the date so inserted is to be regarded
1. Clear intention of the parties – substance over form will be observed, as as the true date.
far as negotiable instruments are concerned. Hence, so long as the clear When date may be inserted:
intention of the parties to make the instrument negotiable can be
1. Where an instrument is payable at a fixed period after date but is issued
determined, the law will give it force and effect
undated
2. Use of foreign language – does not affect negotiability
3. Mere defect in language or grammatical error – does not affect 2. Where an instrument is payable at a fixed period after sight but the
negotiability acceptance is undated
Effect of insertion of wrong date:

Sec 11. Date, presumption as to – Where the instrument or an 1. If done by one having knowledge of true date – instrument is avoided as to
him or any one claiming under him
acceptance or any indorsement thereon is dated, such date is
deemed prima facie to be the true date of the making, drawing, 2. If subsequent holder in due course receives an instrument with the wrong
date – as he acquires the instrument in good faith, even if the date is wrong,
acceptance or indorsement, as the case may be. it will be regarded as the true date
Presumption as to date:
1. Date of instrument, acceptance, or any indorsement –
Sec 14. Blanks; when may be filled – Where the instrument is
a. If instrument bears a date – said date is presumed to be the date when wanting in any material particular, the person in possession
it was made or drawn
b. If acceptance or indorsement in bill is dated – it is considered the date
thereof has a prima facie authority to complete it by filling up the
of such acceptance or indorsement blanks therein. And a signature on a blank paper delivered by
c. The indorsement of the instrument is dated the person making the signature in order that the paper may be
2. Evidence of a different date: he who claims some other date is the true converted into a negotiable instrument operates as a prima
date has the burden to establish such claim. But since these dates are merely facie authority to fill it up as such for any amount. In order,
prima facie evidence of the true dates in the making, drawing, acceptance, however, that any such instrument when completed may be
or indorsement of the instrument, such dates may be overturned by enforced against any person who became a party thereto prior
convincing evidence to the contrary
to its completion, it must be filled up strictly in accordance with
Date in instrument: the authority given and within a reasonable time. But if any such
1. General rule – date is not essential to make an instrument negotiable instrument, after completion, is negotiated to a holder in due
2. Exceptions – course, it is valid and effectual for all purposes in his hands, and
a. Where instrument is payable at a fixed period after date – “X days after
he may enforce it as if it had been filled up strictly in accordance
date;” date is material to determine date of maturity or date from which to with the authority given and within a reasonable time.
start counting X days Steps in issuance of negotiable instrument:
b. Where instrument is payable at a fixed period after sight or presentment – 1. Mechanical act of writing the instrument completely and in accordance
“X days after sight;” date is material to determine when the counting will with Sec 1 requirements
commence to run
2. Delivery of the complete instrument by the maker or drawer to the payee
Date in instrument payable on demand – immaterial, since such instrument is or holder with the intention of giving effect to it
payable anytime.
SECTION 14 Incomplete and delivered
Exception:
SECTION 15 Incomplete and undelivered
1. Promissory notes – must be presented for payment within a reasonable time
after its issue SECTION 16 Complete but undelivered
2. Bills of exchange – within a reasonable time after the last negotiation Blanks:
OBVIOUS BLANKS APPARENTLY COMPLETE
Sec 12. Ante-dated and post-dated – The instrument is not invalid Left at time instrument is made or Blanks only because written matter
for the reason only that it is ante-dated or post-dated, provided indorsed, of such a character as does not so fully occupy the entire
manifestly to indicate that the paper as to preclude the insertion
this is not done for an illegal or fraudulent purpose. The person to instruments are incomplete until of additional words, figures, or both
whom an instrument so dated is delivered acquires the title such blanks shall be filled up
thereto as of the date of delivery.
Rules where instrument incomplete but delivered:
Ante-dated – when date contained is earlier than the true date of issuance
1. Authority to fill up the blanks – holder in possession has prima facie authority
Post-dated – when date contained is later than the true date of issuance to complete an incomplete instrument by filling up the blanks therein
Effect of ante-dating and post-dating – no effect as to the negotiability of an 2. Authority to put any amount – a signature on a blank paper delivered in
instrument, so long as it is not done for an illegal or fraudulent purpose order that it may be converted into a negotiable instrument operates as a
Effectivity of instrument ante/post-dated – when an ante-dated or postdated prima facie authority to fill it up as such for any amount
instrument is delivered to a person, the latter acquires the title to the 3. Right against party prior to completion – instrument may be enforced only
instrument as of the date of its delivery, regardless of the date appearing on against a party prior to completion if filled up strictly in accordance with the
the instrument authority given and within a reasonable time

5
Negotiable Instruments
Atty. Rommel Mercado
4. Right of holder in due course – defense that the instrument had not been Sec 17. Construction where instrument is ambiguous – Where the
filled up in accordance with the authority given and within a reasonable time language of the instrument is ambiguous or there are omissions
is a personal defense. It is not available as against a holder in due course
therein, the following rules of construction shall apply:
(a) Where the sum payable is expressed in words and also in
Sec 15. Incomplete instrument not delivered – Where an figures and there is a discrepancy between the two, the sum
incomplete instrument has not been delivered, it will not, if denoted by the words is the sum payable; but if the words are
completed and negotiated without authority, be a valid ambiguous or uncertain, reference may be had to the figures to
contract in the hands of any holder, as against any person whose fix the amount;
signature was placed thereon before delivery.
(b) Where the instrument provides for the payment of interest,
Rules where instrument incomplete and undelivered:
without specifying the date from which interest is to run, the
1. Defense against a holder in due course – the fact that an incomplete interest runs from the date of the instrument, and if the instrument
instrument, completed without authority, has not been delivered, is a real
is undated, from the issue thereof;
defense even against a holder in due course
2. Defense available to parties prior to delivery – invalidity of the above (c) Where the instrument is not dated, it will be considered to be
instrument is only with reference to parties whose signatures appear on the dated as of the time it was issued;
instrument before and not after delivery
(d) Where there is a conflict between the written and printed
provisions of the instrument, the written provisions prevail;
Sec 16. Delivery; when effectual; when presumed – Every (e) Where the instrument is so ambiguous that there is doubt
contract on a negotiable instrument is incomplete and whether it is a bill or note, the holder may treat it as either at his
revocable until delivery of the instrument for the purpose of election;
giving effect thereto. As between immediate parties and as
regards a remote party other than a holder in due course, the (f) Where a signature is so placed upon the instrument that it is
delivery, in order to be effectual, must be made either by or not clear in what capacity the person making the same
under the authority of the party making, drawing, accepting, or intended to sign, he is to be deemed an indorser;
indorsing, as the case may be; and, in such case, the delivery (g) Where an instrument containing the word "I promise to pay"
may be shown to have been conditional, or for a special is signed by two or more persons, they are deemed to be jointly
purpose only, and not for the purpose of transferring the property and severally liable thereon.
in the instrument. But where the instrument is in the hands of a AMBIGUITY or OMISSION RULE
holder in due course, a valid delivery thereof by all parties prior
Sums expressed in words vs. sums Expressed in words, because figures
to him so as to make them liable to him is conclusively presumed. expressed in figures form no part of the instrument and
And where the instrument is no longer in the possession of a party are simply an abridgement, and it is
whose signature appears thereon, a valid and intentional easier to change figures or to
delivery by him is presumed until the contrary is proved. commit a mistake on them

Rules where mechanically complete: Ambiguous Words or Uncertain Figures may be referred to in order
to determine true amount
1. Undelivered – instruments completely written is incomplete and revocable
until delivery for purpose of giving it effect Undated Instrument Date of issuance will govern
a. Delivery – transfer of possession, actual or constructive from one Written v. Printed Written, because they are deemed
person to another to express true intent of the maker
b. Issue – first delivery of the instrument, complete in form, to a person or drawer
who takes it as holder
Bill v. Note Holder may treat either at his
c. Holder – payee or indorsee of a bill or note who is in possession of it, or
election
the bearer thereof
Capacity of person who signed in Indorser. This rule only applies when
2. Delivered – place where instrument was written, signed, or dated, does
doubt there’s an ambiguity in the
not necessarily fix or determine place where it was executed. Delivery is
signature’s location
what’s of decisive importance, it is the final act essential to its consummation
as an obligation. May be made via agent Instrument signed by two or more Solidary Liability
persons
3. In possession of party other than a holder in due course – if a complete
instrument is found in the possession of an immediate party or a remote
party other than a holder in due course, there is a prima facie presumption
of delivery but subject to rebuttal Sec 18. Liability of person signing in trade or assumed name – No
a. Immediate parties – refers to those who are immediate in the sense of
person is liable on the instrument whose signature does not
having or being held to know of the conditions or limitations placed appear thereon, except as herein otherwise expressly provided.
upon the delivery of the instrument But one who signs in a trade or assumed name will be liable to
b. Remote parties – parties who are not in direct contractual relation to the same extent as if he had signed in his own name.
each other
GR: only persons whose signatures appear on an instrument are liable
4. Delivered conditionally or for a special purpose – if delivery was made or
authorized, it may be shown to have been conditional, or for a special XPN:
purpose only, and not for the purpose of transferring the property to the 1. Where a person signs in a trade or assumed name
instrument 2. The principal is liable if a duly authorized agent signs on his own behalf
5. In the hands of a holder in due course – if a complete instrument is in the 3. In a case of forgery, forger is liable even if his signature does not appear
hands of a holder in due course, a valid delivery thereof by all parties prior to on instrument
him is conclusively presumed. This is equivalent to saying that in such case, 4. Where acceptor makes his acceptance of a bill on a separate paper
delivery is not necessary 5. Where a person makes a written promise to accept a bill before it is
drawn

6
Negotiable Instruments
Atty. Rommel Mercado
Signing in a trade or assumed name – one who signs in a trade or assumed Indorsement by incapacitated persons:
name is liable as if he signed his own name
1. Minors – voidable at his instance or at the instance of his guardian
1. Trade name – business name or a pseudonym used by companies to
2. Other incapacitated persons – others who have no capacity to give
perform their business
consent are insane or demented persons and deaf-mutes who do not know
2. Assumed name – a pseudonym or alias that a person or group assumes for how to read and write. Such is a real defense, which is available even against
a purpose which can differ from the original name a holder in due course
Indorsement by a corporation: corporation is not liable on notes in a suit
thereon by an indorsee, where the corporation is without capacity to make
Sec 19. Signature by agent; authority; how shown – The signature the contract in fulfillment of which they were executed
of any party may be made by a duly authorized agent. No
particular form of appointment is necessary for this purpose; and
the authority of the agent may be established as in other cases Sec 23. Forged signature; effect of – When a signature is forged
of agency. or made without the authority of the person whose signature it
Signature by an authorized agent:
purports to be, it is wholly inoperative, and no right to retain the
instrument, or to give a discharge therefor, or to enforce
1. Authority of agent to sign principal’s name – may be shown, as in other
cases of agency, to have been given orally or in writing subject to the
payment thereof against any party thereto, can be acquired
provisions of the Statute of Frauds through or under such signature, unless the party against whom
it is sought to enforce such right is precluded from setting up the
2. Authority of agent to indorse instrument payable to principal – right of an
agent to indorse commercial papers is a very responsible power and will not forgery or want of authority.
be lightly inferred Forgery: (1) signing of another’s name; (2) alteration of an instrument in the
3. Corporations act only by agents – any person who accepts for cash checks name, amount, description of the person and the like; there must be intent to
made payable to a corporation, which can act only by agents, without defraud
making any inquiry as to the authority of the individual to exchange checks Application:
belonging to said payee-corporation, does so at his peril, and must abide by
the consequences if the supposed agent who indorses the same is without 1. GR: forgery makes the SIGNATURE wholly inoperative; no right can to
authority retain, give a discharge, or enforce payment can arise therefrom
2. XPN: (1) party to whom it is sought to be enforced is precluded from
setting up the forgery or want of authority; and (2) the forged signature
is not necessary to the holder’s title, in which case the forgery may be
Sec 20. Liability of person signing as agent, and so forth – Where
disregarded
the instrument contains or a person adds to his signature words 3. Sec. 23 applies in the following cases:
indicating that he signs for or on behalf of a principal or in a a. The signature on the instrument is affixed by one who does not claim
representative capacity, he is not liable on the instrument if he to act as an agent and who has no authority to bind the person whose
was duly authorized; but the mere addition of words describing signature he has forged
b. The signature is affixed by one who purport to be an agent but has no
him as an agent, or as filling a representative character, without
authority to bind the alleged principal
disclosing his principal, does not exempt him from personal
liability. Effect of forged signature: the signature is wholly inoperative and no right can
be acquired thru the forged signature; person whose signature is forged was
Requisites for an agent to escape personal liability after signing a negotiable never a party because he never consented
instrument:
Forgery: a real defense against a holder in due course
1. He is duly authorized
Proof of Forgery: a mechanism of fraud; must be proven clearly and
2. He adds words to his signature indicating that he signs as an agent, that
convincingly; the burden of proof lies on the party alleging forgery
is, for or on behalf of a principal, or in a representative capacity
3. He discloses his principal – failure to do so will render him personally Cases of Forgery:
bound by the instrument
1. Forgery of Promissory notes
a. Forgery of an indorsement
b. Forgery of the maker’s signature
Sec 21. Signature by procuration; effect of – A signature by 2. Forgery of bills of exchange
"procuration" operates as notice that the agent has but a limited a. Forgery of an indorsement
authority to sign, and the principal is bound only in case the b. Forgery of the drawer’s signature, either
agent in so signing acted within the actual limits of his authority. i. With acceptance by the drawee
ii. Without such acceptance but the bill is paid by the drawee
Procuration: act by which a principal gives power to another to act in his
place as he could himself. It gives a warning that the agent has but a limited Extent of Effect of Forgery: does not purport to declare the instrument totally
authority, so that is the duty of the person dealing with him to inquire into the void nor the genuine signatures thereon inoperative; ONLY APPLIES TO THE
extent of his authority FORGED OR UNAUTHORIZED SIGNATURE; rights mays till exist and may be
enforced
Effect of signature by procuration:
Forged Indorsement: prevents any subsequent party from acquiring any right
1. Where agent exceeded his authority – principal is not bound if agent against any party whose name appears prior to forgery; the forged
exceeded actual limits of his authority, although he may have acted within indorsement cuts off the rights of all subsequent parties against parties prior to
the general scope of the agency the forgery; except, when such party is precluded from setting up the forgery
2. Where agent acted with abuse of authority given – abuse of authority is not Persons precluded from setting up the defense of forgery: synonymous to
a defense against a bona fide holder for value estoppel
Two classes:
Sec 22. Effect of indorsement by infant or corporation – The 1. By their acts, silence, or negligence are estopped from setting up the
indorsement or assignment of the instrument by a corporation or defense of forgery
by an infant passes the property therein, notwithstanding that 2. Who warrant or admit the genuineness of the signatures in question: (a)
indorsers; (b) acceptors; and (c) persons negotiating by delivery
from want of capacity, the corporation or infant may incur no
liability thereon. Right to recover damages: party precluded by reason of his negligence can
still recover damages under quasi-delicts
7
Negotiable Instruments
Atty. Rommel Mercado
Examples: Rights of parties in case of forged indorsements:
1. Drawee bank paid a check with the name of the drawer forged, 1. NOTE Payable to order
although amount of the check exceeds authorized limit – gross - the party whose indorsement is forged is not liable to any holder, even
negligence and the irregularity was apparent on its face a holder in due course
2. Drawer’s negligence facilitated the encashment of checks and - Parties prior to forgery are also not liable to holder
prevented the discovery of fraud – failed to provide security and 2. NOTE Payable to bearer
safekeeping measures for spoiled checks; failed to reconcile bank - The party whose indorsement is forged is liable to aholder in due
statements; the proximate cause course but not to a holder not in due course
3. Drawee bank fails to timely notify collecting bank of forgery after - Prior parties to the forged signature may also be held liable by a bolder
clearing; there is a 24-hour period for a drawee bank to return a check not in due course
to the collecting bank if the check is defective; however, drawee bank - Forged endorsement does not prevent the transfer of title
still has a remedy against the party who made the alteration 3. BILL payable to order
4. Depositor entrusted to his secretary who was able to encash and deposit - The party whose indorsement is forged is not liable to any holder, even
several checks: (1) whoever claims for damages by reason of forgery has if a holder in due course
the burden of proof; (2) he was negligent - Signature of payee was forged, collecting bank is liable tot payee and
5. Failure to examine bank statements – proximate cause of his own must bear the loss because it has the duty to ascertain payee’s
damage; he had sufficient opportunity to prevent or detect indorsement before encashing
misappropriation - If the drawee pays under a forged indorsement, the drawer is not
6. Collecting bank or last indorser generally suffers the loss because it has liable in the bill and the drawee may not debit the drawer’s account;
the duty to ascertain the genuineness of all prior indorsements, unless the it may pass the liability back thru the collection chain to the party who
collecting banks was able to exercise its due diligence took from the forger and the forger himself
7. If payment is made, drawee cannot charge It to the drawer’s account - Check received for collection and deposit, the bank cannot be
because he is in a position to detect the forgery because he has the expected to know or ascertain the genuineness of all prior
maker’s signature and is expected to know and compare it; unless, indorsements
drawer’s negligence is the proximate cause of his loss, in such case, - By stamping, a collecting bank makes the assurance that it has
there needs to be a weighing of comparative negligence between the ascertained the genuineness of all prior indorsements
draw and the drawee to determine who should bear the burden of loss
[xxx]
8. Banking is a business imbued with public interest and must exercise a
higher degree of due diligence 4. BILL payable to bearer
- The drawee may debit from the drawer’s account in spite of the
Note: when an indorsement is forged, the collecting bank or last indorser
forged instrument
bears the loss; unless, the drawee bank fails to return the check to the
- Forged endorsement is not necessary to the title of the holder
collecting bank within 24 hours
- Drawee bank cannot recover from holder
Proximate Cause: cause, which, in natural and continuous sequence,
unbroken by any efficient intervening cause, produces the injury , and without
which the result would not have occurred
Sec. 124. Alteration of instrument; effect of. - Where a negotiable
instrument is materially altered without the assent of all parties
FORGERY OF SIGNATURE OF FORGERY OF INDORSEMENT
liable thereon, it is avoided, except as against a party who has
DRAWER
himself made, authorized, or assented to the alteration and
Drawee is in a position to verify the Drawee has no opportunity to verify
subsequent indorsers.
drawer’s signature an indorsement
Drawee is liable to its depositor for Drawee can recover the money it
But when an instrument has been materially altered and is in the
paying forged check paid because of a forged signature hands of a holder in due course not a party to the alteration, he
may enforce payment thereof according to its original tenor.
Right of drawee to recover payment where drawer’s signature is forged: As
between equally innocent persons, the drawee who pays money on a check Material Alteration: any change in the instrument which affects or changes
where the signature on which is forged cannot recover the money from the the liability of the parties in any way or changes the contract of the parties
one who received it – based on estoppel, actual and presumed negligence, thereto in any respect
and principle of natural justice Section 124: refers to physical alterations of the instrument
Drawee bank: has the obligation to know the signature of th drawer and is Effect of Alteration:
presumed that he does.
1. Alteration by a party - alteration made by the HOLDER is shall effect the
Drawee Bank’s responsibility: discharge of the instrument and all prior parties thereto who did not give
1. He bears the loss if he pays out on a forged signature of the depositor their consent to such alteration
2. If the payee is not a client of the drawee bank, the latter had no way of a. It does not matter whether it is favorable or not to the party making
ascertaining the authenticity of the payee’s indorsement on the checks; the alteration or to the interests of prior parties, or whether it is
thus, it cannot be held negligent innocently or fraudulently made
3. In case both he drawee bank and collecting bank are at fault, there will b. There are certain exceptions on the effect of material alteration. It
be a weighing of comparative negligence. does not discharge the instrument against:
i. A party who has made the alteration
Right of drawee to recover payment where payee’s or indorser’s signature
ii. A party who authorized or assented to the alteration
was forged:
iii. Indorser who indorsed subsequent to alteration
1. From the encasher or the last indorser – drawee bank has no duty to c. If alteration is apparent, the party claiming under the instrument has
ascertain the genuineness of the sigantures of the payee or indorsers; an the burden to explain the alteration or that he had no part therein or
indorser is supposes to warrant to the drawee that the signature of the that he is a holder in due course
payee and previous indorsers are genuine Drawee may recover money d. If it is not apparent on the face of the instrument despite exercising
from negligent encashers or last indorsers because of the latter’s due diligence, the burden is on the party alleging it
negligence e. If drawee-bank pays a materially altered check, it has no right of
2. From the drawer or depositor; generally, drawee bank cannot debit or reimbursement from the drawer
charge the drawer’s account for the amount of the check it paid and is 2. Alteration by a stranger – it is called spoliation, which has the same effect
not entitled to indemnification; the drawee bank bears the loss; EXCEPT, as alteration
when the drawer is guilty of negligence which causes the bank to honor 3. Right of a holder in due course
such a check a. Material alteration avoids the instrument in the hands of one who is
3. In case of forgery by an agent or employee, the negligence of the NOT a holder in due course as against any prior party who has not
depositor prevents the recovery of an unauthorized payment because assented to the alteration
he failed to exercise due diligence
8
Negotiable Instruments
Atty. Rommel Mercado
b. If negotiated to a holder in due course, he may enforce payment Non-acceptance of check with erasure, alteration, or deficiency: it shall not
thereof according to its original tenor regardless of whether the be eligible or acceptable for clearing EXCEPT Post-dated checks bearing
alteration was innocent or fraudulent the Bank Stamp
Ratio:
1. To maintain the integrity surrounding commercial relations – no party shall Sec 24. Presumption of consideration – Every negotiable
be benefitted under the guise to alter the written obligation of another
without his authority or assent; otherwise, it would allow the perpetration
instrument is deemed prima facie to have been issued for a
of fraud valuable consideration; and every person whose signature
2. The discharge of the debt upon one who tampers with the instrument – appears thereon to have become a party thereto for value.
no man should be permitted to take the chance of gain by the
Consideration: inducement to a contract; the cause, price, or impelling
commission of a fraud without running the risk of loss in case of detection
influence which induces a person to enter into the contract; the proximate
purpose
Sec. 125. What constitutes a material alteration. - Any alteration Motive: personal or private reasons of a party in entering into a contract
which changes: Presumption of Consideration:
(a) The date; 1. Need not be expressly stated – it is presumed that it has been issued for
(b) The sum payable, either for principal or interest; a valuable consideration and that every person whose signature
appears there has become a party thereto for value
(c) The time or place of payment: 2. Need not be alleged and proved – it is presumed the payee or holder
(d) The number or the relations of the parties; does not have the burden of proof
(e) The medium or currency in which payment is to be 3. Lack of consideration as a defense – may be used only against the
made; payee. Other holders who take instrument in good faith may demand
(f) Or which adds a place of payment where no place of payment even though no consideration was given between original
parties on the instrument
payment is specified, or any other change or addition
which alters the effect of the instrument in any respect,
is a material alteration. Sec 25. Value, what constitutes — Value is any consideration
Section 125: provides a list of material alteration; if not mentioned, the sufficient to support a simple contract. An antecedent or pre-
alteration is immaterial and will not discharge the instrument nor affect the existing debt constitutes value; and is deemed such whether the
liability of the parties to the instrument prior to the alteration (ex. Serial number, instrument is payable on demand or at a future time.
marginal figures).
Consideration: any prestation sufficient to support any contract in favor of the
1. Date party to an instrument, it may consist in giving, doing, or not doing
- whether it hastens or postpones the time of payment; the same
applies for date from which interests runs; Adequacy of Consideration: valuable consideration need not be adequate,
- HOWEVER, date of indorsement is not material IF it is not necessary to it is sufficient if it is valuable; mere inadequacy of the price is not a ground for
fix the maturity of the instrument UNLESS the issue is whether the voiding the instrument, unless there is fraud, mistake, or undue influence
indorsement was made before or after maturity Valuable consideration: in general terms be said to consist either in some right,
2. Sum payable interest, profit, or benefit accruing to the party who makes the contract, or
- Change in the amount of the principal or interest, to increase or some forbearance, detriment, loss, responsibility, act, labor, or service, on the
reduce other side
- Addition of “with interest”
Antecedent or Pre-existing Debt:
- Alteration in marginal figures is NOT material when the sum stated in
words in the body remains unchanged 1. Debt of a third person – its discharge is a valuable consideration for a
- Insertion of “with interest” AFTER execution with authority of the maker negotiable instrument
IS NOT material 2. Security for pre-existing debt – negotiable instruments may used as a
- Insertion of “legal rate of interest” where the instrument has a provision security for new purchases and antecedent debts as well
for interest at __ percent is NOT material
3. Time of payment
- Change in the maturity of the instrument, whether the time of Sec 26. What constitutes holder for value – Where value has at
payment is curtailed or extended
any time been given for the instrument, the holder is deemed a
- Changes in the marginal notation to correct an obvious mistake is NOT
material holder for value in respect to all parties who become such prior
- Change of date if the one stipulated does not appear in the calendar to that time.
is not material Holder for value: one who has given a valuable consideration for the
4. Place of Payment instrument issued or negotiated to him; the holder (who is the last indorsee of
- Changes place of payment or inserts a place of payment where non an instrument) is also considered a holder for value with respect to all persons
is specified BECAUSE maker is deprived if the advantages under Sec. who became parties to the instrument prior to the time it is shown that
70 valuable consideration had been given
- Changes in the name of a bank a which an instrument is payable after
execution IS NOT material
5. Number or relations of the parties Sec 27. When lien on instrument constitutes holder for value —
- Addition of co-maker. Addition of surety after the name of co-maker;
addition of trustee after the name of the payee; erasure of payee’s
Where the holder has a lien on the instrument arising either from
name’ insertion of the name of another person; leaving a space blank contract or by implication of law, he is deemed a holder for
ETC. (refer to book, sobrang daming examples) value to the extent of his lien.
6. Medium or currency of payment
Holder has a lien on instrument:
- “in current funds” or “in gold coins” or originally in Philippine Peso and
altered to US Dollars Amount of Instrument is more than Amount of Instrument is less than
7. Other alterations debt the equal to the debt
- Substitution of the word or bearer for or order or vice versa; writing Pledgee is a holder for value to the Pledgee is a holder for value for the
protest waived above blank indorsement; erasure of without recourse extent of his lien. He can collect the full amount and may, therefore,
above signature of indorse; change of “I” to “We” full value of the instrument, and recover all

9
Negotiable Instruments
Atty. Rommel Mercado
apply the same to the payment of - If accommodation party pays, he becomes the holder of the
the debt but he must deliver the instrument
surplus to the pledgor 2. IN CASE OF CORPORATIONS
- Sec. 29 does not apply because the issue or indorsement by a
If defenses exist between pledgor and party liable: pledgee can collect on corporation without consideration and for the accommodation of
instrument only to the extent of the amount of debt. If the defenses of the
another is ULTRA VIRES
party liable on the instrument are real defenses, the pledgee can recover
- Signatories thereof will be personally liable if it is proven that the
nothing upon the instrument
accommodation was done in their personal capacities
3. ACCOMODATION PARTY AS A SURETY
Sec 28. Effect of want of consideration – Absence or failure of - The accommodated party is the principal debtor
- He is equally and absolutely bound
consideration is a matter of defense as against any person not a
- In contrast to a surety agreement, the accommodation party is
holder in due course; and partial failure of consideration is a
primarily liable and unconditional as well for a holder for value – he is
defense pro tanto, whether the failure is an ascertained and a solidary co-debtor
liquidated amount or otherwise. - Except in case of the defense of absence of consideration, the
Absence of consideration – total lack of any valid consideration for the accommodation party is still liable to a holder in due course
contract, in consequence of which the alleged contract must fall. In other 4. RIGHT OF ACCOMMODATION PARTY TO NOTICE OF DEFAULT OR
words, if no consideration is given, or if the consideration is illegal DELINQUENCY OF THE ACCOMMODATED PARTY
Failure of consideration – failure or refusal of one of the parties to do, perform, - Right to be appraised of default or delinquency because he is
or comply with the consideration agreed upon. In other words, if the agreed solidarily liable
consideration did not materialize. Partial failure of consideration is a defense - Failure to do so would entitle the accommodation party to payment
pro tanto, meaning to the extent of the failure for damages
5. INSTRUMENT VITIATED BY AN ILLEGALITY OF CAUSE
Personal defense – absence or failure of consideration is only a personal
defense because it is a good defense only as against a holder who is not a - Payee or holder cannot recovery against the accommodation party
holder in due course 6. LIABILITY OF SOLIDARY ACCOMMODATION MAKERS
- Accommodation makers executed a note or a bill jointly and
severally, anyone of them may be held liable when the principal
Sec. 29. Liability of accommodation party. - An debtor failed to pay
accommodation party is one who has signed the instrument as Rights of Accommodation Party:
maker, drawer, acceptor, or indorser, without receiving value
1. RIGHT TO REVOKE ACCOMODATION
therefor, and for the purpose of lending his name to some other - Since accommodation is gratuitous, it may be revoked by
person. Such a person is liable on the instrument to a holder for cancellation or by notice to the interested parties at any time before
value, notwithstanding such holder, at the time of taking the the instrument is negotiated for value
instrument, knew him to be only an accommodation party. - If already negotiated, he is liable according to the face of the
Accommodation Note or Bill: undertaking
2. RIGHT TO REIMBURSMENT FROM ACCOMODATED PARTY
- the accommodation party puts his name, without consideration, for the - If he pays to the holder, he is entitled to reimbursement from the
purpose of accommodation some other party who shall use it, and is accommodated party
expected to pay; a loan of one’s credit - Generally, accommodated party is expected to pay directly to holder
- Accommodation paper creates no obligation upon delivery to the because the former is the real debtor
accommodated party and has no legal effect and creates no 3. RIGHT TO CONTRIBUTION FROM OTHER SOLIDARY ACCOMODATION
obligation until delivered or negotiated to a holder of value MAKER
Accommodation party: - Solidary maker may seek the contribution of theor solidary
accommodation makers to satisfy their obligation, in the absence of
- signed the instrument (a) as maker, drawer, acceptor or indorsee; (b)
an agreement to the contrary and subject to conditions imposed by
without receiving value for the signature; and (c) the purpose of lending
law
his name to some other person;
- An implied promise to equally share the burden resulting from the
- expects that the accommodated party shall pay come due date
execution of the note
- He is in effect a surety of the accommodated party
Without Receiving Value Therefor: does not mean that one cannot be an
Accommodated Party:
accommodation party because he received some consideration for the use
- One in whose favor a person without receiving value therefor, signa an of his name; the last word therefor refer to the instrument and not the use of
instrument fir the purpose of lending his credit and enabling said party to the name. THUS, there was “no value received for the instrument”
raise money upon it
Kinds of accommodation party:
- Impliedly agrees to take up the instrument upon maturity and indemnify
the accommodation party in case of non-payment 1. Accommodation Maker
2. Accommodation Drawer
Parol Evidence: it may be used to prove accommodation because it is
3. Accommodation Acceptor
difficult to tell from the signature whether one signs as an accommodation
4. Accommodation Indorser
party
ACCOMMODATION PARTY REGULAR PARTY
No presumption: one who signs the check without any indication as to what
capacity is presumed to be an accommodation party. Signs the instrument without Signs the instrument for value
receiving value therefor
Liability of accommodation party to a holder:
Signs for the purpose of lending his Does not sign for said purpose
1. In case of ABSENCE OF CONSIDERATION between the accommodation name for another
party and the accommodated party
- It is not a valid defense a holder for value, even though he knew of May show parol evidence to prove Cannot disclaim or limit his liability
such fact when he became a holder accommodation as appearing on an instrument by
parole evidence
- Accommodation party has no right to the instrument unless
accommodated party defaults

10
Negotiable Instruments
Atty. Rommel Mercado
Cannot avail of the defense of Ma avail the defense of absence or - The payment of a check by the drawee bank is not a negotiation and
absence or failure of consideration failure of consideration against a does not make the bank a holder in due course.
against a holder not in due course holder not in due course - The bank is neither the payee or indorsee. The moment the check is
received by the bank it is extinguished and cannot be put in circulation.
After paying the holder, he may sue May not sue a subsequent party for
for reimbursement the reimbursement - The writing of the name of the holder on the back of the check is not an
accommodated party indorsement. It merely serves as a receipt for money. Once paid, the
check becomes a voucher. Payment only effects a discharge not a
transfer of title.
Sec. 30. What constitutes negotiation. - An instrument is - Bank has no obligation to make partial payments when a check is drawn
negotiated when it is transferred from one person to another in for a greater amount than what is in the account of the depositor. This is
such manner as to constitute the transferee the holder thereof. If because upon partial payment, the bank cannot ask the holder to
surrender the check as payment is incomplete. Thus, the bank would not
payable to bearer, it is negotiated by delivery; if payable to have a voucher to show that the amount has been paid. This rule is
order, it is negotiated by the indorsement of the holder and based on commercial convenience.
completed by delivery. Meaning of assignment
Mode of transfer of bill or note: - The assignment of a bill or note merely means a transfer of the title to the
Transfer - process by which property is delivered by one person to another. instrument, with the assignee taking only such title as his assignor has. It is
The transfer of a negotiable instrument may be by delivery or by delivery and subject to all the defenses available against his assignor.
indorsement. - The word transfer is also used when referring to assignment. The transfer
Bill of exchange/ promissory note - may be transferred in many different ways. always constitutes assignment of contract, when negotiation takes
The law does not prescribe any exclusive method of transferring negotiable place, the transferee becomes a holder.
instruments but only the manner in which their independence of equities or - An express prohibition written on the instrument is required to render an
defenses that might obtain between the original parties may be preserved. instrument non-assignable or non-transferable. A stamp of non-
3 methods of transferring a negotiable instrument: negotiable does not preclude the assignment or transfer of the
instrument.
 Issue - first delivery of a complete instrument to a person who takes it as
a holder. An instrument’s legal life does not begin until it is issued by the Effect of delivery of order instrument without indorsement:
maker or drawer to the first holder. - The transfer operates as an assignment.
 Negotiation- It ordinarily involves indorsement, thus negotiation and
indorsement are often use interchangeably. Negotiation allows the - The transferee will not become the holder of the instrument. However,
transferee to acquire a better right to a negotiable instrument that the the assignee acquires the right to have the indorsement of the assignor.
transferor had. Whether the holder is a holder in due course depends When an indorsement is subsequently obtained, the transfer operates as
upon factors other than the fact of negotiation. Requires delivery of the a negotiation only as of the time indorsement is actually made.
instrument. - Effect: you cannot collect on anyone who did not indorse the instrument
 Assignment - it may or may not involve indorsement in the sense of writing but you can still collect from the maker.
in the back of the instrument. Although it may be transferred by
indorsement and delivery, the assignee acquired the instrument subject NEGOTIATION ASSIGNMENT
to the rules applicable to non-negotiable papers. Requires delivery of the Refers to negotiable instruments Refers to a general contract
instrument.
Transferee is a holder Transferee is an assignee
Subject to real defenses Subject to real and personal
Meaning of negotiation defenses
- No negotiation if the transfer does not make the transferee the holder of May acquire a better title or greater Steps into the shoes of the assignor
the instrument.
rights to the instrument
- The manner required for negotiation depends on the form of the
A general indorser warrants the Does not warrant the solvency of
instrument.
solvency of the prior parties prior parties unless expressly
 Payable to order- delivery with indorsement stipulated or the insolvency is
 Bearer instrument- delivery only known to him

- The payee/ indorsee of a bill or note who is in possession of it or the bearer Indorser is not liable until there is Liable even without notice of
thereof is the “holder”. notice of dishonor dishonor

Methods of negotiation NIL Civil code Art. 1624-1635

1. Payable to order Note: The differences are immaterial when only the maker is sought to be
held.
- Payable to the payee therein or the indorsee or to the person ordered
or authorized by the payee to collect. Payment by means of an instrument is merely conditional

- The order or authority is made by means of indorsement followed by - The payment through assignment or negotiation with the use of
delivery of indorsee. negotiable instruments is merely conditional. It is conditional that it can
only be converted to cash at maturity.
- The instrument must be shown when demanding payment from the
party who is being asked to pay. - Different from insurance because in insurance the moment that the
check or note is accepted, the insurance becomes operative.
2. Payable to bearer
Can there be a negotiation to payee? There are 2 schools of thought
- Any person in possession of the an instrument is always the bearer
thereof although he may have no legal right thereto. 1. No, since delivery is part of the creation of a negotiable instrument. Thus,
the first delivery to the payee is not a negotiation because before the
- If the instrument is negotiated to a holder in due course, the latter may writing is delivered there can be no negotiable instrument.
acquire a better right than the transferor.
2. Yes, negotiated is not confined to transfer after delivery to the payee
3. Delivery because a holder may also be a payee. This is supported by sec 30 & sec
- Actual or constructive possession, from one person to another. 191 which provides that an instrument is negotiated when it is delivered
to the payee, indorsee or to the bearer thereof.
Payment of instrument by drawee not negotiation
Ways that an instrument can be negotiated to a payee
11
Negotiable Instruments
Atty. Rommel Mercado
1. The payee, as the first holder, acquires title to the instrument via issue. If - The place where the indorsement is written is not essential. It may be at
the negotiation refers to an instrument already completed or issued then the front or back.
only the holders subsequent to the payee can acquire title by
- May also be written on a paper attached to the instrument. This is known
negotiation. The delivery must be made diretly by the maker/drawer to
as allonge.
the payee.
- When it is unclear as to what capacity a person intended to sign, he shall
2. When delivery is made by the maker/drawer to a person not the payee,
be deemed as an indorser.
such as an agent of the maker or drawer, the payee has acquired title
by negotiation. - An allonge can be used even if there is still space on the instrument. This is
allowed since nobody would gain any advantage by inserting his name
3. When the instrument is delivered back to the payee by the last holder,
in the space and rendering himself liable to those who endorsed below
the payee becomes a holder. The indorsement of the last holder is not
him upon the note or the allonge.
needed because payee is remitted to his former rights.
Delivery of negotiable instrument
1. Actual/ constructive Sec. 32. Indorsement must be of entire instrument. - The
indorsement must be an indorsement of the entire instrument. An
2. Indorsement is an indorsement completed by delivery.
indorsement which purports to transfer to the indorsee a part only
3. The delivery of the instrument is the operative facts that shows the of the amount payable, or which purports to transfer the
intention of the maker/drawer to be bound by it.
instrument to two or more indorsees severally, does not operate
4. Delivery is presumed from possession , however this can be rebutted by as a negotiation of the instrument. But where the instrument has
proof that the instrument was lost or stolen. This does not apply against a
been paid in part, it may be indorsed as to the residue.
holder in due course.
- Indorsement must be for the whole instrument because there cannot be
Where delivery is conditional
partial delivery of one instrument or piecemeal payments to several
- Condition precedent- the instrument becomes operative only upon the persons. The object is to avoid multiplicity of suits because an instrument
happening of a future, contingent event. Can be proven by parole divided into different parts divides the cause of action.
evidence because this is a condition precedent attaching to the
- Joint payees- indorsement to transfer the instruments to 2 or more people
obligation.
severally does not operate as a negotiation because the cause action is
Condition subsequent: parole evidence is not admissible to show a parole split. However, it is valid when the indorsees are joint.
condition. The written contract governs.
- Alternative payees- payable to 2 or more alternative payees. Negotiation
of the instrument may be made by the indorsement of either of them.
Sec. 31. Indorsement; how made. - The indorsement must be
written on the instrument itself or upon a paper attached thereto. Sec. 33. Kinds of indorsement. - An indorsement may be either
The signature of the indorser, without additional words, is a special or in blank; and it may also be either restrictive or
sufficient indorsement. qualified or conditional.
- Indorsement is the writing of the name of the payee at the back of the Methods of negotiation
instrument to transfer title to it or strengthen the security of the holder by
a. Special
assuming a contingent liability for its payment or both.
b. Blank
- Indorsement involves a new contract and an obligation on the part of the
Kind of title transferred
indorser- implied guaranty.
a. Restrictive
- Each indorsement generates an additional contract between the indorser
b. Non-restrictive
and all subsequent holders.
Scope of liability of indorser
- An indorsement involves the certainty of 2 things: (1) identity of the
a. Qualified
indorser (2) genuineness of the signature
b. Unqualified/ general
- A person cashing or paying on the instrument has the duty to ascertain
Presence or absence of limitations
both before paying
a. Conditional
- Acceptor does not admit the genuineness of the indorser’s signature.
b. Unconditional
Necessity of indorsement Other kinds of indorsement
- Essential to the execution of the instrument payable to the order of the a. Joint
maker/drawer. b. Successive
- Essential to the negotiation of an order instrument. c. Irregular/ anomalous
- A person may acquire title even without indorsement. However, without d. Facultative
the indorsement, the holder cannot be a holder in due course. Note: Once an instrument satisfies all the requirements of negotiability, no
- Estoppel may take the place of an indorsement to uphold the transfer of indorsement, even a restrictive one can negate its negotiable status.
a note or bill such as where the indorsement is forged or unauthorized and
the other party is precluded from setting up the forgery.
Sec. 34. Special indorsement; indorsement in blank. - A special
Forms of indorsement
indorsement specifies the person to whom, or to whose order, the
- Indorsement must be in writing or in print. The indorsement in rubber stamp instrument is to be payable, and the indorsement of such
or typewritten complies with the requirement.
indorsee is necessary to the further negotiation of the instrument.
- The use of the word assign does not make a negotiation a mere An indorsement in blank specifies no indorsee, and an instrument
assignment. so indorsed is payable to bearer, and may be negotiated by
- The signature of an indorser without any words is blank indorsement. delivery.
- When the name of the indorsee is specified, it is a special indorsement. Special indorsement:
The indorser may add words which prohibit or further limit the negotiation
of the instrument. - 2 forms of special indorsement: (1) specifies the person to whom the
instrument is payable (2) specifies to whose order the instrument is
Place of indorsement payable.

12
Negotiable Instruments
Atty. Rommel Mercado
- Must be signed by the indorser the instrument as directed and that the indorsee only has a restrictive
title.
- No need for the use of the words of negotiability. It is enough that the
instrument is valid on its face. - Use of restrictive words removes the negotiability of the instrument.
- If the instrument is payable to order and is negotiated by special 3 classes of restrictive indorsement
indorsement, the indorsement of the indorsee is necessary for the further
 Prohibits further negotiation- limits the payment of the instrument to a
negotiation of the instrument.
specific person
- If payable to order, can be negotiated by mere delivery even if with  Constitutes indorsee agent of indorser- indorsee is the collection agent in
special indorsement. Effect is that the indorser will only be liable to those behalf of another
holders who acquired title through his indorsement. A special  Vests title in indorsee for the benefit of the indorser or a 3rd party- trust or
indorsement will convert a bearer paper to an order paper and the party agency relationship
specified will have to indorse the instrument before it can be further
negotiated.
Blank indorsement Sec. 38. Qualified indorsement. - A qualified indorsement
constitutes the indorser a mere assignor of the title to the
- Specifies no particular indorsee
instrument. It may be made by adding to the indorser's signature
- Consists of only the signature of the payee or indorser on the back of the the words "without recourse" or any words of similar import. Such
instrument.
an indorsement does not impair the negotiable character of the
- Payable to bearer and may be negotiated by delivery alone. instrument.
- Indorser becomes mere assignor
Sec. 35. Blank indorsement; how changed to special - Limits the liability of the indorser
indorsement. - The holder may convert a blank indorsement into - Qualified by the words “sans recourse”, “without recourse”, “at
a special indorsement by writing over the signature of the indorsee’s own risk”, or “indorser not holder” to either a blank or special
indorser in blank any contract consistent with the character of indorsement
the indorsement. - Recourse means a resort to a person who is secondarily liable after the
- An instrument payable to order in its face may become a bearer default of the person primarily liable.
instrument if the last indorsement was blank. However, a holder may - An indorsement without recourse does not affect the negotiable quality
protect himself by converting the instrument into an order instrument by of the instrument but only shows an unwillingness to be answerable for
writing over the signature of the indorser in blank any contract consistent the solvency of the parties. It passes title without making the indorser
with the character of the indorsement. liable upon the instrument.
- But a bearer instrument remains as that and is negotiable by mere - The words “I hereby transfer and assign all my right, title, and interest”
delivery even if the indorsement is a blank or special one. and other similar words of assignment or transfer appearing above the
Note: Writing of the words “protest waived”, “demand”, or “notice waived” signature of the indorser constitute an indorser without recourse.
constitutes a material alteration as it would vary the liability of the indorser. However, the rights of the indorsee is limited to the rights acquired by the
assignor.
- Despite the qualified indorsement, the indorser is still secondarily liable for
Sec. 36. When indorsement restrictive. - An indorsement is the breach of warranties. Thus he is still liable for the non-payment of the
restrictive which either: instrument when there is forgery, lack of good title to the instrument
indorser, lack of capacity to contract on the part of prior parties, the fact
(a) Prohibits the further negotiation of the instrument; or that the instrument was valueless or not valid at the time of the
(b) Constitutes the indorsee the agent of the indorser; or indorsement which fact was known to him.
- Good precaution to indorse without recourse if the instrument has a long
(c) Vests the title in the indorsee in trust for or to the use of some
period of maturity because there is a danger that the principal debtor
other persons. might become insolvent.
But the mere absence of words implying power to negotiate - A qualified indorsement does not affect the negotiability of the
does not make an indorsement restrictive. instrument.

Sec. 37. Effect of restrictive indorsement; rights of indorsee. - A


restrictive indorsement confers upon the indorsee the right: Sec. 39. Conditional indorsement. - Where an indorsement is
(a) to receive payment of the instrument; conditional, the party required to pay the instrument may
disregard the condition and make payment to the indorsee or
(b) to bring any action thereon that the indorser could bring; his transferee whether the condition has been fulfilled or not. But
(c) to transfer his rights as such indorsee, where the form of the any person to whom an instrument so indorsed is negotiated will
indorsement authorizes him to do so. hold the same, or the proceeds thereof, subject to the rights of
But all subsequent indorsees acquire only the title of the first the person indorsing conditionally.
indorsee under the restrictive indorsement. Absolute indorsement: Indorser binds himself to pay when the other parties fail
to pay and upon due notice of such.
- A restrictive indorsement prohibits the the further negotiation of the
instrument or restricts it for a particular person or for a particular purpose Conditional indorsement
or modifies the rights of the holders or the liabilities of the indorser. - The indorser imposes some other conditions to his liability or on the
- Destroys the negotiability of the instrument. The defenses available indorsee’s right to collect the proceeds of the instrument.
against the indorser are not cut all off by the transfer of the instrument - In the nature of a special indorsement, it does not affect the further
under such an indorsement in the absence of waiver or estoppel. All negotiation of the instrument. The party required to pay may do so
subsequent indorsees acquire only the title of the first indorsee under the without incurring any liability. But the person who received payment will
restrictive indorsement. hold the proceeds subject to the right of the conditional indorser.
- Limits the rights of an indorsee because the indorser notifies all - While a condition in the indorsement does not destroy negotiability, a
prospective indorsers that the indorsee has only the authority to deal with condition appearing on the face of the instrument renders the instrument
non-negotiable.
13
Negotiable Instruments
Atty. Rommel Mercado
- Binding only between the indorser and the indorsee. Any variance between the name of the payee on the face of an instrument
and the signature on the back thereof should be ignored if the payee and
the indorser are the same person.
Sec. 40. Indorsement of instrument payable to bearer. - Where
an instrument, payable to bearer, is indorsed specially, it may
nevertheless be further negotiated by delivery; but the person Sec. 44. Indorsement in representative capacity. - Where any
indorsing specially is liable as indorser to only such holders as person is under obligation to indorse in a representative
make title through his indorsement. capacity, he may indorse in such terms as to negative personal
liability.
- An instrument payable to bearer is not converted to an instrument
payable to order by virtue of a special indorsement. The instrument may - An instrument may be indorsed by a person either personally or through
be negotiated further by delivery. The only effect of the special an agent.
indorsement is that he will be liable to those holders who can trace their - The authority of the agent need not be in writing.
title to the instrument by a series of unbroken indorsements from such
special indorsement. His liability shall be that of a general indorser.
Sec. 45. Time of indorsement; presumption. - Except where an
- Applies only to instruments originally payable to bearer
indorsement bears date after the maturity of the instrument,
every negotiation is deemed prima facie to have been effected
Sec. 41. Indorsement where payable to two or more persons. - before the instrument was overdue.
Where an instrument is payable to the order of two or more - To constitute one a holder in due course he must have taken the
payees or indorsees who are not partners, all must indorse unless instrument before it was overdue
the one indorsing has authority to indorse for the others. - If the indorsement bears a date, the presumption is that it is the true date.
- If the indorsement is without a date, the presumption is that it was
Application: two or more payees or indorsees jointly NOT instruments payable negotiated before maturity
to two or more persons severally (example of non -application: Pay to the - He who alleges that the indorsement was effected AFTER maturity has
order of P or A) in the latter case, it is governed by Sec. 8 (e) and may be the burden of proof
negotiated by any of such alternative payees and anyone of such parties in
possession is the holder.
Indorsement by all payees or indorsees: If payable TO THE ORDER of 2 or more Sec. 46. Place of indorsement; presumption. - Except where the
payees or indorsees, all must indorse the order to operate as negotiation. In contrary appears, every indorsement is presumed prima facie to
case of lack of the other’s indorsement, the indorsee has no right of action have been made at the place where the instrument is dated.
Indorsement of a Co-Payee: If he had no authority to sign for the other, the - an indorsement is presumed to have been made at the place where the
instrument is no longer transferable as a negotiable instrument and becomes instrument is dated, unless the contrary is proven
a non-negotiable. However, the indorsement and delivery of the instrument - an indorsement is governed by the law of the state where it is made
by one of two joint payees to his co- payee may transfer full title to the latter. although the instrument is executed in a different state.
Exception to the rule requiring joint indorsement:
1. Where payees or indorsees are partners
- An indorsement of an instrument payable to partners doing business
Sec. 47. Continuation of negotiable character. - An instrument
under a firm name, must be in the name of such firm negotiable in its origin continues to be negotiable until it has
2. Where the payee or indorsee indorsing has authority to indorse for others been restrictively indorsed or discharged by payment or
Sec. 42. Effect of instrument drawn or indorsed to a person as otherwise.
cashier. - Where an instrument is drawn or indorsed to a person General Rule: an instrument negotiable in origin is always negotiable until paid
as "cashier" or other fiscal officer of a bank or corporation, it is even if the instrument dishonored, or is already overdue, however, any one
who acquires it would no longer be a holder in due course.
deemed prima facie to be payable to the bank or corporation
of which he is such officer, and may be negotiated by either the Exceptions:
indorsement of the bank or corporation or the indorsement of the 1. When the instrument has been restrictively indorsed
officer. - should be construed to refer only to such restrictive indorsement as
prohibits further negotiation of the instrument
Cashier and other officers: may be expressly authorized to issue a negotiable 2. When it has been discharged by payment or otherwise
paper for the corporation or may have such power from implication by reason - payment is not the only way of discharging an instrument (refer to Sec.
of having previously exercised such power; 119)
Instrument drawn or indorsed to a cashier or other officers: it is deemed prima Note: An instrument indorsed after it become overdue is considered payable
facie payable to the corporation and may be negotiated by such on demand
corporation thru the indorsement of any of its duly authorized officers.
GR: a paper that is non-negotiable in its inception continues to be non-
Corporation: does not include municipal corporations negotiable; indorsement cannot change its character
Rebuttable Presumption: may be disproved by sufficient evidence to the XPN: If indorsed to order or bearer, it becomes, as between the indorser and
contrary – where the cashier personally owns the instrument subsequent holders, a negotiable instrument.

Sec. 43. Indorsement where name is misspelled, and so forth. - Sec. 48. Striking out indorsement. - The holder may at any time
Where the name of a payee or indorsee is wrongly designated strike out any indorsement which is not necessary to his title. The
or misspelled, he may indorse the instrument as therein described indorser whose indorsement is struck out, and all indorsers
adding, if he thinks fit, his proper signature. subsequent to him, are thereby relieved from liability on the
Options in case of misspelled indorsements: instrument.
1. Sign his name in the same way it appears Instrument payable to bearer: may be negotiated by mere delivery without
2. Sign his name but adding his proper signature indorsement; if indorsed, it remains a bearer instrument and may be further
negotiated by mere delivery
A person may correct a spelling error only if the intention of the maker or
drawer was that the instrument should be payable to the person making the
correction.
14
Negotiable Instruments
Atty. Rommel Mercado
Option of Holder: Strike out all intervening indorsement or any of them for none Person OTHER THAN a Holder in Due Course: the negotiable instrument is
of them is necessary of his title; cancellation of an indorsement also released subject to the same defenses, whether real or personal, as if it were non-
those subsequent indorser from liability on the instrument. negotiable.
Instrument Payable to Order: may be negotiated only by the indorsement of Note: Secs. 58-59 provides that a holder who is not himself a holder in due
the payee completed by delivery; course but derives his title from a HOLDER IN DUE COURSE is given the rights of
such prior holder.
- If indorsement is special – special indorsee is necessary for further
negotiation Taking for Value:
- Blank indorsement – it becomes an instrument payable to bearer
- essential to the status of a HOLDER in DUE COURSE – where the right to
enforce an instrument free from certain defenses stems
- For a HOLDER for VALUE – he may enforce the liability of an
accommodation party notwithstanding that the time of taking he knew
Blank Indorsement in an ORDER Instrument: that such party is only an accommodation party
- holder can strike out all indorsements subsequent to the blank - Note: time and extent to which value is given is material on the question
indorsement; of status as holder in due course
- subsequent special indorsement are not necessary because he could Note: A holder of a negotiable instrument is not necessarily the owner thereof.
have acquired title thereto by mere delivery;
Rights of a HOLDER:
- the indorser whose indorsement is cancelled and all indorsers
subsequent to him are thereby discharged from their liability. 1. To Sue – he may sue on the instrument in his name; however, a person
- BUT HE CANNOT STRIKE OUT THE PAYEE’S INDORSEMENT – the instrument is who not the payee or is the holder of a bad check has no personality to
originally payable to order and cannot be validly negotiated without his sue and has no cause of action
indorsement 2. To Receive Payment – he may receive payment and if the payment is in
due course, the instrument is discharged.
Payment in due course: payment made:
Sec. 49. Transfer without indorsement; effect of. - Where the
holder of an instrument payable to his order transfers it for value 1. At or after the maturity of the instrument
- Note: if the instrument is paid before maturity, the prior party who
without indorsing it, the transfer vests in the transferee such title reacquires the same, may reissue and further negotiate it under
as the transferor had therein, and the transferee acquires in 2. To the holder thereof
addition, the right to have the indorsement of the transferor. But 3. In good faith and without notice that his title is defective
for the purpose of determining whether the transferee is a holder Right of Transferee of Unindorsed Instrument to Sue: Jurisprudence is
in due course, the negotiation takes effect as of the time when inconsistent; transferee of an unendorsed instrument is NOT a holder, however,
the indorsement is actually made. it is believed that he can still sue because the transfer vests him such title as
the transferor had, and if the latter had LEGAL TITLE, this must pass by the
Application: instrument payable to order, where indorsement of the payee is transfer.
necessary for negotiation.
Lack of Indorsement: transferee cannot negotiate the bill by indorsing it to
another. The transaction operates as an equitable assignment and the
Sec. 52. What constitutes a holder in due course. - A holder in due
transferee acquires the instrument subject to defenses and equities available course is a holder who has taken the instrument under the
among prior parties. He cannot negotiate it. following conditions:
Transferee: acquires legal title and the right to have the indorsement of the (a) That it is complete and regular upon its face;
transferor and the right as holder of the legal title and maintain legal action (b) That he became the holder of it before it was overdue, and
against the maker, acceptor, or other party liable.
without notice that it has been previously dishonored, if
Note: before the indorsement is made, the transferee is not a holder of the such was the fact;
instrument – not a holder because he is not a payee or indorsee; thus, they do
not enjoy the presumption of ownership in favor of holders.
(c) That he took it in good faith and for value;
(d) that at the time it was negotiated to him, he had no notice
Note: this only applies to transfer without indorsement of an instrument FOR
of any infirmity in the instrument or defect in the title of the
VALUE; if gratuitous, the transferee has no right to compel the transferor to
make the indorsement, but he has a right to sue thereon. person negotiating it.
Indorsement after transfer: transferee may require transferor to indorse the Holder in Due Course:
instrument because he has the right to an unqualified indorsement, unless the - took the instrument and all the conditions given by Sec. 52 are present
contrary is proven.; such indorsement converts the transfer into a negotiation - takes the instrument FREE of MOST defenses and adverse claims to it by
and makes the transferee a holder – indorsee in possession (does not other parties
retroact). - also called a bona fide holder or bona fide holder for value without
notice
Negotiation: operates as a valid transfer to make the transferee a holder in
Sec. 51. Right of holder to sue; payment. - The holder of a
due course
negotiable instrument may to sue thereon in his own name; and
payment to him in due course discharges the instrument. If all conditions are present: he is qualified as a holder in due course. EVERY
HOLDER IS GENERALLY DEEMED PRIMA FACIE A HOLDER IN DUE COURSE.
Holder: the payee or indorsee of a bill or note who is in possession of it, or the
Holder: payee or indorsee of a bill or note, who is in possession of it, or the
bearer thereof, entitled to receive the sum for which it calls; includes: (1)
bearer thereof.
persons possessing bearer instruments; (2) Payees possessing order
instruments; (3) Indorsees possessing order instruments Status as Mere Assignee:
Three classes of Holders of Negotiable Instruments: - a holder of a non-negotiable instrument cannot attain the status of a
holder in due course; he is a mere assignee subject to defenses
1. Holders simply
- part indorsee is merely an assignee
2. Holders for value
- transferee who receives an Instrument other than by issue or negotiation
3. Holders in due course
cannot be regarded as a holder in due course
Ordinary Holder: qualifies as a holder but does not meet all the conditions to
Presumption: there is a PRIMA FACIE presumption that the holder is a holder in
qualify as a holder in due course
due course, the burden of proving otherwise lies in the person disputing the
presumption

15
Negotiable Instruments
Atty. Rommel Mercado
Rights of the Holder NOT in Due Course: the instrument is subject to defenses o The possession by the payee of holder with one or more installment
as if it were non-negotiable overdue does not signify dishonor – he retains it for collection of the
balance
Rights of the HOLDER IN DUE COURSE: most-favored status under the law;
o Assuming that non-payment of installment is tantamount to
takes the instrument free of many defenses that exist between the original
dishonor of the whole instrument, the holder has no notice of
parties; may acquire greater rights than those possessed by the payee or
dishonor unless he has notice of non-payment
holder
3. Where transferee with notice of non-payment
Payee as a holder in due course: there are two views on whether the payee - He cannot be a holder in due course (without explaining or pointing
is entitled the same protection as a holder for value to legal basis
1. CONTRARY VIEW - the holder in due course must have acquired the - Dissenting Opinion (refer to book)
instrument through negotiation and an instrument is issued and not Holder without notice of dishonor
negotiated to a payee.
1. Ways and time of dishonor
2. AFFIRMATIVE VIEW - payee may be a holder in due course under any of
- Instrument may eb dishonored by (1) Non-acceptance; or (2) Non-
the circumstances in which he meets the requirements of Section 52.
payment
Note: Majority of jurisprudence supports the affirmative view - Dishonor of non-acceptance refers to bills of exchange and may
Drawee as Holder in Due Course: occur even before date of maturity
- Dishonor of non-payment takes place at the time of maturity
- a drawee does not, by paying a bill, become a holder in due course 2. Negotiation after maturity or dishonor
under this section - An overdue or dishonored instrument may still be negotiated either by
- when the drawee accepts and pays the instruments, it strips its indorsement or delivery
negotiability and reduces it to a voucher or proof of payment - In case of negotiation by INDORSEMENT of an overdue or dishonored
Instrument Complete and Regular Upon Its Face: instrument, the holder cannot be a holder in due course
- In case of negotiation by DELIVERY of an overdue or dishonored
1. Wanting in any material particular instrument, the holder without notice can be a holder in due course
- Instrument is INCOMPLETE when it is wanting in any material particular 3. Non-payment of Interest Due – the fact that interest is unpaid, and the
or other particulars without which the instrument is incomplete principal is not yet due, does not render the note dishonored
- If a holder offers an INCOMPLE ISNTRUMENT, he has the duty to inquire
as to why it is incomplete. Holder in Good Faith
- If he fails to do so, he takes the instrument subject to all defenses and 1. Meaning of Good Faith
equities - Sec. 52 (c) refers to good faith of indorsee or transferee
- if the omission is not an important particular, such omission will not - Honesty in fact in the transaction concerned without knowledge or
deprive the holder of the right of a holder in due course notice of any material fact which would render it dishonest
2. Alteration apparent on face of the instrument - Case to case basis
- To render the instrument irregular, alteration, tampering or erasure 2. Proof of Good Faith
must be visible or apparent on the face of the instrument, for if it is not - Determined by the facts and circumstances of the case
apparent, the matter is governed solely by Section 124 which renders - Honesty of intention and absence of suspicious circumstances,
the instrument void. - if such circumstances exist, then such inquiry as will satisfy a prudent
Holder Before Instrument is Overdue: man of the validity of the transaction
3. Meaning of Bad Faith
1. When instrument is overdue: after date of maturity, either: - The person to whom the instrument is negotiated must have actual
- Date of maturity is the time fixed therein knowledge of the infirmity or defect or knowledge of such facts which
- If payable on demand, date of maturity is determining by the date of render it dishonest form him to take a negotiable instrument
presentment, which must be made within a reasonable time after 4. Proof of Bad Faith
issuance. - Prove that he has actual knowledge of the defect or ignored the fact
- If the instrument is with a fixed maturity calendar date, it is overdue at of such defect
the beginning of the day after the fixed date - Not necessary that it be knowledge of the exact truth, just the facts
- If payable on occurrence of an event which is certain to happen, the which tend to show that there was something wrong with the
date of maturity is fixed by the happening of the event and becomes transaction
overdue the next day after said date. 5. Equitable Doctrine of Clean Hands
2. Overdue instrument puts all persons on notice - He knew from the face of the instrument that there was defect or
- A negotiable instrument in circulation past its maturity date carries infirmity, therefore, he cannot seek relief from the court
strong indication that it has been dishonored;
- An overdue paper puts all persons on notice that it may not have Effects of Crossing a Check: the drawer intends the check to be deposited
been paid because of a valid defense to such payment. only by the rightful person – the payee named therein. Crossing a check has
- Note: on fixed date, the debtor has the WHOLE DAY to pay the following effects:
3. Overdue instrument still negotiable 1. It may not be encashed but only deposited in the bank
- It is still negotiable although subject to defenses existing at the time of 2. The check may be negotiated only once
transfer 3. Serves as a warning to the holder that the check has been issued for a
- Not subject to the same defenses as if it were non-negotiable definite purpose so that he must inquire if he has received the check
Instrument in part of overdue and in part not: pursuant to such purpose, otherwise, he is not a holder in due course
1. Where installments due before transfer Note: Holder cannot claim he acted in good faith when it was aware that the
- An installment note is not overdue as o installments due before transfer checks were crossed and bore restrictions when it accepted them
and the transferee cannot be a holder in due course as to such Note: holder may still recover from the party who indorsed or encashed the
installment, with or without notice of non-payment check if the latter has no valid excuse for refusing payment
2. Where transferee without notice of non-payment
- He is a holder in due course as to installments to mature in the future Holder for Value
- If there is no acceleration clause, the fact that maturity of one or more 1. Adequacy of Consideration
installments have passed does not make the instrument overdue as to - any consideration sufficient to support a simple contract is VALUE
installments payable in the future - Not necessary that it be adequate or that it represents full value
o Circulation of a negotiable instrument after due date of an - If grossly inadequate or unreasonable, it raises a suspicion of bad faith
installment (except the last) cannot serve as notice that the - Love and affection do not constitute value
installment has not been paid 2. Taking of Instrument for Value
o If the principal obligation is overdue, then the instrument is overdue - Taking for value is the right to enforce an instrument free from certain
after maturity of the first installment defenses

16
Negotiable Instruments
Atty. Rommel Mercado
- Holder for value may enforce the liability of an accommodation party 2. It does not apply where the holder received the paper and gave his
notwithstanding that at the time of taking he knew that he was only promise which he must perform when he has incurred liability to a third
an accommodation party person – he has the same protection as one who has paid the instrument
- Time when and the extent to which value is given is material in at the time of the transfer
determining a holder in due course
3. Three methods of giving value for an instrument: A holder takes the
instrument for value Sec. 55. When title defective. - The title of a person who
a. To the extent that the agreed consideration has been performed or negotiates an instrument is defective within the meaning of this
that he acquires a security interest in or a lien on the instrument
Act when he obtained the instrument, or any signature thereto,
otherwise than by legal process
b. He takes the instrument in payment of or as security for an antecedent by fraud, duress, or force and fear, or other unlawful means, or
claim against any person whether or not the claim is due for an illegal consideration, or when he negotiates it in breach of
c. When he gives a negotiable instrument for it or makes an irrevocable faith, or under such circumstances as amount to a fraud.
commitment
Note: each method involves actual performance by the holder an not
just a commitment or promise to do something Defective Title In General:
Holder without notice of infirmity in instrument or defect of title 1. Defects of Title – personal or equitable defenses and those equities of
ownership where there is ab breach of faith in negotiation
1. Notice at time of negotiation
2. Infirmities – things that are wrong with the instrument itself as distinguished
- At the time the instrument was negotiated to him, he had no notice of
from those things that are lacking in the contracts of the instruments (ex.
any infirmity in the instrument or defect in the title of the person
Date, material particulars, delivery)
negotiating it
- Every holder is deemed prima facie a holder in due course When title of a person is defective:
2. Lack of Bad Faith 1. In the acquisition – he obtained the instrument or any signature thereto
- In order for there to be NOTICE, the holder must have actual or by fraud, duress, or force and fear, or other unlawful means, or illegal
chargeable knowledge of the infirmity or defect or must have acted consideration
in bad faith 2. In the negotiation – he negotiates the instrument in breach of faith, or
3. Bad Faith of Agent under such circumstance as amount to fraud
- Considered as constructive knowledge of the principal and will render
him a holder NOT in due course Good Faith of Taker and Negotiator
- Sec. 55 seeks to prevent someone who takes an instrument with notice
that his transferor is not acting honestly from becoming a holder in due
Sec. 53. When person not deemed holder in due course. - Where course
an instrument payable on demand is negotiated on an - Emphasizes the honesty of the negotiator as brought to the notice of the
unreasonable length of time after its issue, the holder is not taker
deemed a holder in due course. - Generally, to require an honest and fair transaction to constitute one as
a holder in due course
Holder in Due Course In Instrument Payable on Demand:
- Holder in due course is someone who became a holder thereof before it Sec. 56. What constitutes notice of defect. - To constitutes notice
is overdue – it applies only to an instrument payable at a fixed or
of an infirmity in the instrument or defect in the title of the person
determinable future time
- Sec. 53 governs instruments payable on demand negotiating the same, the person to whom it is negotiated must
- If negotiation is made OUTSIDE of REAONABLE TIME after its issuance, the have had actual knowledge of the infirmity or defect, or
holder cannot be deemed a holder in due course knowledge of such facts that his action in taking the instrument
- The fact that it has been in circulation for a long time is a strong indication amounted to bad faith.
that it has been dishonored
- Reasonable Time – indefinite; refer to the nature of the instrument, the Notice: the transferee must have actual knowledge of the infirmity in the
usage of trade or business with respect to such instrument, and the facts instrument or defect; in the title of the indorser or knowledge of such facts that
of the particular case his action in taking the instrument amounts to bad faith. Actual knowledge is
shown by the instrument itself.
Mere negligence to make inquiries is insufficient: negligence to make inquiries
Sec. 54. Notice before full amount is paid. - Where the transferee is not the equivalent of bad faith or actual knowledge. The test is whether the
receives notice of any infirmity in the instrument or defect in the transferee had notice of the defect or infirmity or have reasonable suspicions.
title of the person negotiating the same before he has paid the This is a question of fact. Thus, consulting an attorney before taking of the note
or the fact that the payee indorsee “without recourse” constitute a badge of
full amount agreed to be paid therefor, he will be deemed a
guilty knowledge.
holder in due course only to the extent of the amount therefore
paid by him. When knowledge amounts to bad faith: If the holder had actual knowledge
of suspicious circumstances coupled with means of readily informing himself
Effect of Notice Before Full Payment: of the facts and he willfully abstained from doing so, his intentional ignorance
1. No amount has yet been paid – the instrument is taken but the purchaser may amount to bad faith.
has not yet paid and receives notice of infirmity or defect of the HOLDER, - It is not necessary that the holder had knowledge of the particulars of
he is relieved from the obligation to make payment the fraud. All that is required is knowledge of facts that his action in taking
2. An amount has been paid the instrument amounted to bad faith.
- if it was transferred to him in consideration of his promise to make
- Inadequacy of price is in itself insufficient to show bad faith. However, if
future payments, he is under no legal obligation to pay the balance
it is grossly inadequate, it may justify a finding of bad faith
of the amount he has agreed upon discovery of infirmity or defect
- If he does, he can be considered as a holder in due course ONLY TO - Where an instrument is signed by an insolvent person, such circumstance
THE EXTENT of the amount theretofore paid to him alone to require the purchaser to make inquiry as to the genuiness of the
instrument. If he fails to do so, he cannot be deemed as a bona fide
Applicability of Sec. 24: It involves a situation where the holder must protect
purchaser.
himself by refusing to make further payments
Effect of notice of defect: Knowledge or chargeable notice of any defect at
1. Applicable ONLY where the obligation incurred by the holder is that such
the time of the taking of the instrument destroys the status of a holder as a
upon discovering the infirmity, he is relieved from all further obligations.
holder in due course. It opens him up to defenses otherwise cut off against
He has a valid defense not to pay the remaining balance
him and not merely relating to the defect of which he had notice. This does
17
Negotiable Instruments
Atty. Rommel Mercado
not however, modify the rule that the one holding from a holder in due course
may have all the rights of the latter. Sec. 58. When subject to original defense. - In the hands of any
Doctrine of the illustrative cases: holder other than a holder in due course, a negotiable
1. If the holder refuses to say how he obtained the note, he is not a holder instrument is subject to the same defenses as if it were non-
in due course. His silence proves that he had notice of the defect of his negotiable. But a holder who derives his title through a holder in
title from the start. due course, and who is not himself a party to any fraud or
2. The moment that the check was stolen/lost, no on outside of P (maker) illegality affecting the instrument, has all the rights of such former
can be called a holder in due course P had not indorsed it in due course. holder in respect of all parties prior to the latter.
Doctrine of constructive notice is inapplicable: Constructive notice, such as Defenses: grounds or reasons pleaded or offered by the defendant in a case,
notice of lis pendens, cannot be considered as notice to a purchaser of a showing why the plaintiff, as a matter of law or fact, should not be given the
negotiable instrument secured by a mortgage on the land. This does not relief he seeks.
amount to bad faith.
Kinds of Defenses in Negotiable Instruments:
The following, standing alone, does not constitute notice:
1. Real, Absolute, or Universal
1. The instrument is antedated/ postdated - available against all parties, both immediate and remote, including
2. It was issued or negotiated in return for an executory promise or holders in due course or holders through the latter
accompanied by a separate agreement, unless the purchaser has - a holder in due course is not legally entitled to payment from the
notice that a defense or claim has arisen from its terms primary party
- Attaches to the instrument itself, regardless of the merits or demerits of
3. Any party that has signed for an accommodation party the holder or the conduct or agreement of the parties to it
4. An incomplete instrument that was completed, unless the purchaser has - Challenges the validity of the instrument and the instrument cannot
knowledge of any improper completion. be enforced because there is no contract in the first place
- HOWEVER, it is only unenforceable against the party entitled to set up
5. Any person negotiating the instrument that was or is a fiduciary the defense but not against those to whom such a defense is not
6. Default in payment of interest on the instrument or in payment of any available
other instrument except one of the same series. - GENERALLY, a real defense applies only to the person who has made
or drawn the instrument.
7. Filing or recording of the document. Unless notice was received at such
2. Personal, limited, or Equitable
time and in such manner as to give the holder a reasonable opportunity
- grow out of the agreement or conduct of a particular person in regard
to act on the information. It must have been received before the holder
to the instrument which renders it inequitable for him, though holding
receives the interest.
the legal title, to enforce it against the party sought to be made liable
but which are not available against a holder in due course or holders
with all the rights of a holder in due course
Sec. 57. Rights of holder in due course. - A holder in due course - available only against that person or subsequent holder who stands in
holds the instrument free from any defect of title of prior parties, privity with him
and free from defenses available to prior parties among
Samples of real defenses
themselves, and may enforce payment of the instrument for the
1. Incapacity
full amount thereof against all parties liable thereon.
2. Illegality of the contract, unless the maker is part of the illegality
Rights of a holder in due course:
3. No delivery of an incomplete instrument
1. He may sue on the instrument in his own name 4. Forgery
2. He may receive payment and if the payment is in due course, the 5. Want of authority, apparent or real
instrument is discharged. 6. Duress, when one takes the hand of another and forces him at gunpoint
3. He holds the instrument free from any defect of title of prior parties. to sign his name. If there is only a vague threat- personal only. The threat
must be so overwhelming that the victim is entirely deprived of his will.
4. He holds the instrument free from defenses available to prior parties
among themselves 7. Fraud in factum or fraud in esse contractus
8. Fraudulent alteration by holder
5. He may enforce payment of the instrument for the full amount thereof
against all parties liable thereon. 9. Prescription
10. Other infirmities on the face of the instrument
Importance and foundation of due course holding:
11. Discharge at or after maturity
- A holder in due course acquires a better right than any of his Note: A real defense questions the legal validity of the instrument while a
predecessors because he takes the instrument free from most defenses personal defense affects only the validity of the agreement for which the
available to prior parties among themselves. Thus, the fact that it has instrument is issued. The validity of the instrument is recognized, it is the
been stolen or negotiated in breach of faith or has not been delivered is underlying agreement that is in question.
no defense against a holder in due course. He may still enforce the full
amount of the instrument w/o regard to the amount he paid for it. Sample of personal defenses:
- This is founded on public policy, with regard to the utility, free circulation 1) Filling of wrong date
and credit of negotiable paper in the commercial world. The 2) Filling out of blanks not in accordance with the authority given and
convenience and necessities of commerce requires negotiable within reasonable time
instruments which can pass freely in the commercial world as legal 3) Want of delivery of complete instrument
tender and demand the protection of those holding them in due course. 4) Absence or failure of consideration
This protection is sometimes explained as estoppel. Thus, one putting 5) Simple fraud or fraud in inducement
negotiable paper in the market is estopped from contesting the 6) Acquisition of the instrument (not signature) by duress, force, fear
consequences and incidents of his acts. The one who made the wrong 7) Acquisition of the instrument by unlawful means
possible is estopped by his neglect. 8) Acquisition of the instrument for an illegal consideration
9) Negotiation of breach of faith
- A holder in due course is subject ONLY to REAL DEFENSES. This is a 10) Negotiation under fraudulent circumstances
necessity if commercial papers are to circulate freely and prospective 11) Innocent alteration or spoliation
purchasers are to accept them routinely and willingly. 12) Set off bet. Immediate parties
- In case of immediate parties, all defenses are available 13) Discharge by payment or renunciation or release before maturity
14) Discharge of party secondarily liable by discharge of prior party
15) Usury- agreed interest is void
18
Negotiable Instruments
Atty. Rommel Mercado
16) Want of authority of agent who has apparent authority 3. XPN to XPN: (a) When proof has been offered of the genuineness of the
maker's and payee's signatures, the holder is deemed to be a holder in
Immediate parties: parties in direct contractual relation. Signifies privity not
due course and the duty of proceeding to offer some proof of fraud or
proximity.
defect specified, is cast upon the party alleging it; (b) in cases against a
Remote parties: one who takes title to an instrument by negotiation from the party who became bound on the instrument prior to the acquisition of
original payee or any subsequent holder. such defective title
Prior parties: parties who acquired the instrument before the holder in due
course.
Fraud in Factum/ Fraud in the Fraud in the inducement/ simple
execution fraud
- Real defense bec. There is no - Related to the quanity, quality,
contract value or character of the
consideration for the instrument.
- Exists in cases in which a
person, without negligence, - In this case, the signer has
was deceived in signing a knowledge that what he is
negotiable instrument without signing is a negotiable
knowledge that such instrument. The deceit is in its
document was a negotiable amount or terms. It implies that
instrument. the signer knew what he was
signing but that he was induced
- Exception: when in the
by fraud to sign.
exercise of reasonable
diligence he could have
discovered the nature of the
instrument

Rights of a holder not in due Rights of purchaser from a holder in


course due course
- He may sue on the instrument - If instrument is from HIDC then has
in his own name all the rights of the latter even if
he is only a transferee or does not
- He may receive payment
satisfy the requirements of a HIDC
and if the payment is in due
course the instrument is - 2 requisites for him to acquire the
discharged rights of a HIDC:
- Entitled to the instrument but (a) The derives his title from a
subject to the same defenses HIDC
as if it were non-negotiable
(b) he was not party to any
- Has all the rights if a HIDC from illegality or fraud affecting
whom he derives his title in the instrument
respect of all perties prior to
- a payee or indorsee who has a
such holder, provide that he
defective title cannot better it by
was not a part of any fraud or
selling the instrument to HIDC and
illegality affecting the
re-acquiring it again
instrument.

Sec. 59. Who is deemed holder in due course. - Every holder is


deemed prima facie to be a holder in due course; but when it is
shown that the title of any person who has negotiated the
instrument was defective, the burden is on the holder to prove
that he or some person under whom he claims acquired the title
as holder in due course. But the last-mentioned rule does not
apply in favor of a party who became bound on the instrument
prior to the acquisition of such defective title.
Presumption: every holder is deemed prima facie to be a holder in due course
if he is a payee or indorsee who is in possession of the instrument, or the bearer
thereof.
Proof of being a holder: Once the person through whose hands an instrument
has passed shows that he is a holder, he does not have to prove that he
acquired the instrument in where all condition under Sec. 52 are present
Indorser’s Title Defective: the burden of proof shifts to the holder who must
show he is a holder in due course
Note: A person who acquires title from a prior holder in due course is referred
to as holder through a holder in due course.
Rules:
1. GR: Holder is deemed prima favie to be hodler in due course
2. XPN: When the title of any person who has negotiated the instrument
was defective , he must show that he is a holder in due course
19